Tesla's inclusion in the S&P 500 has been discussed for several months now. Despite the fact that the company is suitable by all parameters for inclusion in the index--and is a company everyone seems to want a piece of--the index committee continues to ignore Tesla. But who actually loses here?
Al Root from Barrons tried to figure it out. Tesla (NASDAQ: TSLA) is expected to reach another profitable quarter when it releases earnings results on October 21, after the market closes. For a number of reasons, the reality is that it is the index that needs Tesla, and not vice versa.
"One strategist on Wall Street believes it is imperative — for the index, not the company — to include the electric vehicle pioneer."
Tesla became eligible for inclusion in the S&P 500 after reporting four profitable quarters in a row in July 2020. However, the index has already bypassed the electric vehicle maker several times, instead adding Pool and Etsy.
However, the index committee has never clearly explained the reason for this. Therefore, one can only guess as to why this is happening. S&P constantly informed Barrons that the committee considered many factors, but never broke down how they actually made their decisions. In short, everything is vague and inaccurate.
Meanwhile, with Tesla, we have the most valuable automaker in the world--with an unprecedented market capitalization of over $400 billion. Tesla would be the ninth largest component, trailing, for now, behind Walmart and ahead of Johnson & Johnson. That is why it is a little strange that Tesla is not on the S&P list.
Besides Tesla's value, another reason to add it is that the S&P 500 lags behind similar indices that already have Tesla.
The Russell 1000 index is up 9.1% year to date, while the S&P is up 7.8%. The Russell 1000 Growth Index is up 28% year to date, which is about 4 percentage points better than the S&P 500 Growth Index.
“Over the past three years the Russell 1000 (+ 45.6%) has outpaced the [S&P 500] (+ 44.6%),” Wells Fargo analyst Christopher Harvey pointed out Friday in a research note. “Notably, S&P uses a committee for index changes, introducing some subjectivity. On the other hand, R1000 changes involve little subjectivity: every June 30th Russell family rebalances its indices based on market cap."
Thus, the S&P underperformance could pressure the committee to include Tesla, which could have a temporary impact on the company's share price. However, the S&P 500 would ultimately benefit much more than Tesla as a result.
© 2020, Eva Fox. All rights reserved.
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